Union Budget 2010 will be announced on February 26, 2010, the last working day of this February, by the finance minister Pranab Mukherjee. This will be his second consecutive budget, after first one was met with mixed reactions.

This isÂ Speculation is rife that the FM will undertake measures to curb the rising fiscal deficit in the form of partial roll-back of the stimulus measures announced by the government during the recent global meltdown triggered by sub-prime crisis and liquidity crunch.

Need To Tame High Fiscal Deficit

The stimulus measures announced by the government to ride through the crisis witnessed in last couple of years has pegged fiscal deficit at 6.8% of GDP. Add to it the bill of off-budget subsidies like issue of oil bonds, fertilizer subsidies, etc. which does not feature in the above figure. In fact, the combined fiscal deficit of state and center could be pegged at as high as 12% of GDP.

However, the above high deficit number is also in some way a culmination of prior stimulus measures like Farm loan waiver and Sixth Pay Commission effect. This all culminates in to high budgetary numbers way above FRBM (Fiscal Responsibility and Budget Management) target of 3% of GDP for the centre which calls for fiscal consolidation sooner rather than later.

Partial Roll-back of Stimulus Measures

The measures to step back from the stimulus could be in the form of a combination of several measures which does not put excessive strain on corporate world and individual tax-payers but at the same smoothening enough to gradually bring down the fiscal deficit to around 5% to 5.5% of GDP over a period of next couple of years at least.

The Government can take measures in bringing down the deficit by the way of direct and/or indirect tax measures both. The direct tax measures revolve around budgeting with various tax slabs and limits apart from exemptions in the form of tax. The direct tax measures effects the public in general- from low, middle and higher income group- in the form of newer tax proposals and exemptions.

Direct taxes are more closely related with the tax liability of the public in general as the tax structures are set a percentage of your income which fluctuates depending upon the tax proposals announced by the government in union budget. These direct tax rates were adjusted upwards in the previous budget which calls for lower chances of the hike in tax exemption limit for the public this time around.

The indirect tax measures involves various taxes levied on corporate and consumers in the form excise duty, customs duty, service tax and other business related taxes like Central Sales Tax (CST), Value Added Tax (VAT), etc.

Indirect taxes like Central Excise duty (8%), Custom Duty and Service tax (10%) needs a partial roll-back from the cuts introduced by the government in lieu of the slowdown in last couple of years. Hiking the excise duty by 2% could do wonders for soothing the high fiscal deficit to a certain extent. The IT and ITES industry may want the FM to continue with the tax benefits existing under 10A/10B as incentives. However, the India Inc desires for the removal of corporate surcharge which will further boost their profitability.

Speedy implementation of GST

Tax reforms in the form of speedy implementation of Goods and Service Tax (GST) which necessitates an exit from Central Sales Tax (CST) currently standing at 2%. The smoother implementation of GST would also require removal of various other cess and taxes in order to arrive at a single tax system which would provide for less cumbersome paper work and policies.

The budget would be better-off, if it offers a clue on the way forward for accumulating non-tax revenue like one-time receipts from auction of 3G license. The government also needs to scale up its target and pace of accumulating revenue from disinvestment of its stake from major public sector units. The FM could take this opportunity to make crucial announcements in this budget spanning from reforms in the form speedy implementation of GST and direct tax code; more committed approach by the government with respect to petroleum pricing policy, and other pending reforms in the finance and social sector initiatives.

Taming Record Food Inflation

Last but not the least, with food inflation at 18% record high levels which could have a spill-over affect on other sectors as well thus affecting consumer spending in other key sectors; some fiscal measures can be expected to control the rising food prices. Government can also initiate tight export norms to bring down the domestic food prices on a priority basis.

[…] the same time, he stressed that now India needs to get back to the basics and ensure that the fiscal deficit is tamed and rolled-back to 5.5% in 2010-2011 and 4.8% and 4.1% in 2011-12 and 2012-13 […]